SHREE METAL,DELHI vs. ITO, NEW DELHI

The assessment of search cases of Sh. Rakesh Gupta, Sh. Vishesh Gupta, Sh. Navneet Jain & Sh. Vaibhav Jain are under process with the ACIT, Central Circle-10. During the assessment proceedings u/s 153A in the aforesaid cases, details regarding accommodation entries given by the above entry providers has been obtained by the AO.

The list of accommodation entry recipients has been obtained from Sh. Rakesh Gupta and Sh. Vishesh Gupta. Hard copy of the list is enclosed as Annexure A, duly signed by Sh. Vishesh Gupta. The list gives the name of the firm which has provided the accommodation entry along with the name and address of recipients of accommodation entry.

Sh. Naveen Jain & Sh. Vsaibhav Jain has provided accommodation entry through thirty-seven paper entities. The list of the firms giving accommodation entry is enclosed as annexure-B. The list of accommodation entry recipients, has been obtained from Sh. Navneet Jain & Sh. Vaibhav Jain. It does not give year wise bifurcation. Hard copy of the lost is enclosed as annexure-C, duly signed by Sh. Vaibhav Jain. Thus, the firms mention in the list ‘B’ have provided accommodation entries to the firms mentioned in list ‘C’.

The soft copy of the information in respect to annexure A, B & C is also enclosed.

The information of accommodation entry includes A.Y. 2006-07 also, which is a time barring year for taking action u/s 148.

The information is forwarded to you for early dissemination to various field officers in Delhi (Soft copy also enclosed). On examining the list of accommodation entries provided by Sh. Rakesh Gupta & Sh. Vishesh Gupta dn Sh. Navneet Jain & Sh. Vaibhav Jain pertaining to A.Y. 2006-07, it is noted that the following accommodation entries have been taken by the assessee namely M/s Unique Metal Industries:-

On going through the above reasons it is evident that this assessment has been reopened on the basis of the letter received from the ld. CIT, Central-2, New Delhi with the direction to take necessary action as per section 148 of the Act. As per this, accommodation entries were obtained by various persons from Sh. Rakesh Gupta and Sh. Vishesh Gupta as well as Sh. Navneet Jain and Sh. Vaibhav Jain. Copy of this list was forwarded in a CD to the Assessing Officer. Thus this list contained the name of the assessee. The Assessing Officer reopened the assessment on the basis of this information. The basis given by the Assessing Officer in the reasons is that these persons have admitted that they have given accommodation entries to the parties whose lists have been provided by them. From the above facts it is apparent that the Assessing Officer at that point of time when he recorded the reasons was not having the copy of the statement or any other material in which these people have alleged to have provided accommodation entries to the assessee. This position gets also corroborated from the facts stated by the Assessing Officer 10 himself in the reassessment order in para 3 page 5 which read as under:- “Here it is pertinent to mention that in the intervening period, this office had conversations with the ACIT, Central Circle-10, New Delhi from whom vide this office’s letter dated 23.07.2013, 02.09.2013, 14.10.2013, 06.11.2013, 22.11.2013, 09.12.2013 & 24.12.2013 and vide Joint CIT, Range-39, New Delhi’s letter dated 16.12.2013, the following details/documents were sought:- (i) Copies of the statements recorded of Sh. Rakeh Gupta & Sh. Vishesh Gupta dn Sh. Navneet Jain & Sh. Vaibhav Jain in search/post search/assessment proceedings. (ii) Soft copies of the tatements recorded of Sh. Rakeh Gupta & Sh. Vishesh Gupta dn Sh. Navneet Jain & Sh. Vaibhav Jain in search/post search/assessment proceedings.\ (iii) Hard copy of assessment orders passed in these cases for A.Y. 2006-07 (iv) Soft copy of assessment orders passed in these cases for A.Y. 2006-07 (v) Any other detail/document you may deem fit that need to be confronted with the parties whose cases have been reopened u/s 148 of I. Tax Act. 4. In response to these letters, the ACIT, Central Circle-10, New Delhi vide his letter dated 20.12.2013, received by this office on 27.12.2013, forwarded his reply along with supporting documents, which were running into 92 pages. After going through the reply forwarded by the ACIT, Central Circle-10, New Delhi and the 11 annexure enclosed therein, this office was of the view that the purchase bills provided by the 11 firms/concers controlled and managed by Sh. Rakesh Gupta and Sh. VisheshGupt or their family members is nothing but bogus purchase bills/accommodation bills.”

The above facts stated by the Assessing Officer makes it abundantly clear that at the time of formation of the belief to reopen assessment the Assessing Officer was not having the above said information. Only that he was having the letter along with list which was forwarded by the CIT, Central-2, New Delhi.

The above observation of the Assessing Officer also shows that it was letter dated 20.12.2013 received by him on 27.12.2013 on the basis of which the Assessing Officer could make a view that the purchase bills provided by these persons or their family members is nothing but bogus purchase bills. At the time of recording of the reasons the Assessing Officer apparently was not having any idea about the nature of the transactions entered into by the assessee. In the reasons recorded there is no mention about the nature of the transactions. As per provision of section 147 an assessment can be reopened if the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment. The reasons to believe has to be that of the Assessing Officer and further there have to be application of mind by the Assessing Officer though the reasons to believe does not mean that the Assessing Officer should have finally ascertained the fact that income has escaped assessment but at the same time, it also means that the Assessing Officer is required to 12 examine the facts on the basis of the information and satisfy himself that the taxable income has escaped assessment. In the present case, on going through the reasons it is quite evident that the Assessing Officer was also not aware of the nature of the accommodation entries. In the reasons recorded he has simply mentioned the name of the party and the amount and nowhere has stated the nature of such entry. This also shows that the Assessing Officer has made no effort to look into the return of the assessee which was available with him. This fact gets further supported from the sheet appended to the reasons and quoted on page 4 of the assessment order whereby against Item no. 7, whether the assessment is proposed to be made for the first time, the Assessing Officer has stated ‘Yes’, and in Column no. 7(a), whether any voluntary return had already been filed and in Column no. 8 (b), date of filing the said return ‘NA’ has been stated. Thus this is a clear case of non-application of mind by the Assessing Officer. It may also be relevant that on page 2 of the assessment order, the Assessing Officer himself has stated that in this case the return of income for the year under consideration was filed with this ward on 27.09.2006. These facts clearly demonstrate that the return was with the same ward and at the time of recording of the reasons for reopening the assessment, the Assessing Officer has not looked at the return and in a mechanical way, on receipt of the letter from the CIT, Central-2, New Delhi the assessment has been reopened. It is a settled position of law that there must be material for formation of a belief that income has escaped assessment. Further reasons referred to must disclose process of reasoning by which the Assessing Officer holds reason to believe. There must be nexus between such material 13 and belief. Further and most importantly the reasons referred to must show application of mind by the Assessing Officer. It is also a settled law that the validity of the initiation of the reassessment proceeding is to be judged with reference to the material available with the Assessing Officer at the point of time of the issue of notice under section 148. In the present case, as is evident from the assessment order, the Assessing Officer was having nothing except the list provided by the CIT, Central-2, New Delhi about the list of accommodation entries. Beyond that he was not having the copies of the statement of any of these persons. He was not having copy of the assessment orders and other details or document which would have enabled the Assessing Officer to apply his mind and form a belief that income has escaped assessment. In fact this information was not with the Assessing Officer till fag end of the reassessment proceedings, a fact admitted by the Assessing Officer himself in the assessment order. The judgment relied upon by the learned AR also supports the case of the assessee. In the case of Sarthak Securities Pvt. Ltd. vs. ITO (2009) 329 ITR 110 the Hon’ble jurisdictional Delhi High Court has held that under the circumstances narrated hereinabove the reopening cannot be said to be a valid reopening. The Hon’ble Court has held as under:- “In the case at hand, as is evincible, the AO was aware of the existence of four companies with whom the assessee had entered into transaction. Both the orders clearly exposit that the AO was made aware of the situation by the Investigation Wing and there is no mention that these companies are fictitious companies. Neither the reasons in the initial notice 14 nor the communication providing reasons remotely indicate independent application of mind. True it is, at that stage, it is not necessary to have the established fact of escapement of income but what is necessary is that there is relevant material on which a reasonable person could have formed the requisite belief. To elaborate, the conclusive proof is not germane at this stage but the formation of belief must be on the base or foundation or platform of prudence which a reasonable person is required to apply. As is manifest from the perusal of the supply of reasons and the order of rejection of objections, the names of the companies were available with the authority. Their existence is not disputed. What is mentioned is that these companies were used as conduits. The same has not been referred to while passing the order of rejection. The assessee in his objections had clearly stated that the companies had bank accounts and payments were made to the assessee company through banking channel. The identity of the companies was not disputed. Under these circumstances, it would not be appropriate to require the assessee to go through the entire gamut of proceedings. It is totally unwarranted. Resultantly, the initiation of proceedings under s. 147 and issuance of notice under s. 148 are hereby quashed.”

Similarly in Signature Hotels (P) Ltd. vs. ITO (2011) 338 ITR 51 (Del) the Hon’ble Court has also quashed the reopening of the assessment on the ground that the AO did not independently apply his 15 mind to the information received from the Director of Income Tax (Inv.). The relevant observation of the Court reads as under:- “The first sentence of the reasons states that information had been received from Director of IT (Inv.) that the petitioner had introduced money amounting to Rs. 5 lacs during financial year 2002-03 as per the details given in Annexure. The said Annexure relates to a cheque received by the petitioner on 9th Oct., 2002 from SS Ltd. from the bank and the account number mentioned therein. The last sentence records that as per the information, the amount received was nothing but an accommodation entry and the assessee was the beneficiary. The aforesaid reasons do not satisfy the requirements of s.

The reasons and the information referred to is extremely scanty and vague. There is no reference to any document or statement, except Annexure. Annexure cannot be regarded as a material or evidence that prima facie shows or establishes nexus or link which discloses escapement of income. Annexure is not a pointer and does not indicate escapement of income. Further, it is apparent that the AO did not apply his own mind to the information and examine the basis and material of the information. The AO accepted the plea on the basis of vague information in a mechanical manner. The CIT also acted on the same basis by mechanically giving his approval. The reasons recorded reflect that the AO did not independently apply his mind to the information received from the Director of IT (Inv.) and arrive at a belief whether or not any income had escaped 16 assessment. Company SS Ltd. had applied for and was allotted shares in the petitioner company on payment by cheque of Rs. 5 lacs. SS Ltd. is an incorporated company and the petitioner has pleaded and stated that the said company has a paid-up capital of Rs. 90 lacs. The company was incorporated on 4th Jan., 1989 and was also allotted PAN in September, 2001. The facts indicated above do not show that SS Ltd. is a non-existing and a fictitious entity/person. For the reasons stated above, writ of certiorari is issued quashing the proceedings under s. 148”

In the case of CIT vs. SFIL Stockbroking Co. (2010) 325 ITR 285 (Del) also the Hon’ble High Court has quashed the reopening proceedings on the ground that from the reasons it is not discernible as to whether the AO has applied his mind to the information and independently arrived at a belief that income has escaped assessment. The Hon’ble Court has held as under:-

These cannot be the reasons for proceeding under s. 147/148. The first part is only an information and the second and the third parts of the beginning para of the so-called reasons are mere directions. From the so-called reasons, it is not at all discernible as to whether the AO had applied his mind to the information and independently arrived at a belief that, on the basis of the material which he had before him, income had escaped assessment. Consequently, the Tribunal has arrived at the correct conclusion on facts. There is no substantial question of law which arises for consideration.”

In view of the above discussed facts of the present case, the reopening of the assessment is without application of mind and examination of the facts and accordingly the reopening is held to be invalid and accordingly the same is quashed. Accordingly the reopening is held to be bad in law and ground nos.2 and 3 are allowed”.

Now the issue is whether on the facts and circumstances of this case it can be said that the purchases are bogus. The Assessing Officer has placed reliance on the statement of Sh. Rakesh Gupta and Sh. Vishesh Gupta and Sh. Naveenet Jain & Sh. Vaibhav Jain. Admittedly these statements were recorded at the back of the assessee. Though the copy of the same was provided to the assessee but an opportunity of cross examination has not been allowed to the assessee. The Assessing Officer in this regard has stated that he has issued summons to these persons repeatedly but these persons have not appeared nor has filed the desired details and documents. In the absence of their cross examination and also in the absence of furnishing desired details and the documents it will not be appropriate to substantiate the addition on the basis of the statement. On examination of facts it also transpires that these persons were in the trade of scrap, the same business in which the assessee is engaged. A survey was carried out on these persons and during the course of the survey it is not the case of the department that they were not found not carrying on the same business. On the contrary there is evidence on record that these persons were not only in the business of scrap but also stock of scrap was also found with them.

The department has also made assessment of these persons in respect of the business of scrap carried on by them. The Revenue is doubting the purchases of the assessee on the basis that these persons have made a statement that they have issued accommodation bills and have not made actual sales to the assessee. Can such statements be taken at its face value? If these people were engaged in the scrap trade as contended by the learned AR then there is every possibility that these persons would have collected the scrap for which they were not having any invoices or source of supply and have sold the same to the assessee and to various other parties. On being caught at wrong foot these persons have taken the defence that the sales made by them are not genuine and they have issued accommodation bills. In the present case the assessee has made purchases and there are corresponding sales. These sales are not being doubted. If sales are not being doubted then obviously purchases would be there. Now the learned CIT(A) held that the purchases made by the assessee are not genuine and assessee would have made purchases from some other persons. The case of the assessee is that it has made purchases from these very persons and having made the payment by account payee cheque and there being nothing adverse in the transaction, it is for the supplier i.e. so called people to explain their source of purchase and not the assessee. The Revenue is trying to shift the onus on the assessee by making presumption that the purchases made by it are not genuine despite accepting its sales. In my opinion shifting of this onus and the assumption being made that purchases are not genuine in the present set of facts is not correct. There would have been some logic, had 20 these people would not have been in the same trade and had there been some other circumstances leading to the conclusion that the so called purchases by the assessee under no circumstances can be from these persons. Adverse inference cannot be drawn against a person merely on the basis of doubt. Doubt howsoever strong cannot par- take the character of legal proof. In the present cases there is complete trail of the purchases and sales so far assessee is concerned. The assessee has been able to co-relate each transaction of purchase with sales as is evident from the submission made before the learned CIT(A).

There is a complete co-relation between the purchases and the sales and the same is fully documented. Thus the AO as well as learned CIT(A) was not correct in drawing adverse inference against the assessee on this account. I further note that the learned CIT(A) while giving a finding that the purchases are bogus has placed much reliance on the statement of these persons. As discussed hereinabove the statement of these persons cannot be taken on the face of it in view of the surrounding facts. These persons were definitely in the trade. These persons have not appeared before the Assessing Officer despite repeated summons being issued. Had these persons were clean and wanted to stand by their statement given before the Assessing Officer and the affidavit filed, there was no reason for these persons to not to appear and to stand by their statement. I am also of the view that the CIT(A) was not justified in drawing adverse inference on the basis of the transportation. As rightly pointed by the learned AR that these were local movements. The purchases and sales were within the walled city of Delhi where the transportation is by manual driven carts 21 and the charges for the same are debited under the head cartage. Further when sales are accepted as genuine, then definitely the transactions have occurred and movements of goods have taken place. It is also not the case of the learned CIT(A) that transactions has not happened. Thus transportation on such facts cannot be a basis to draw adverse inference against the assessee. I further note that the learned CIT(A) has upheld the allegation of the Assessing Officer of the bogus purchases by making an observation that the appellant’s dealing with these parties is not free from any doubt. It is a settled law that doubt cannot be a basis for sustaining the allegation. On the contrary the assessee had lead sufficient evidences in support of its purchases which the Assessing Officer in my view has not been able to rebut. Accordingly I am of the view that in the facts and circumstances of the case it cannot be said that the purchases made by the assessee are bogus.

As regards the addition of 20% sustained by the learned CIT(A) I am of the view that since purchases are not bogus, the addition on this account cannot be sustained. Even otherwise the addition of 20% on the facts and circumstances is apparently too high. The learned CIT(A) having held that tax has to be levied on real income and the profit cannot be ascertained without deducting the cost of purchases from the sales as otherwise it amount to levy of tax on gross receipt, she ought to have applied profit rate in this nature of trade. Estimating profit at the rate of 20% by taking into consideration the provisions of section 40A(3) will not lead to determination of correct real income. Section 40A(3) is meant for a different purpose when the assessee has made purchases in cash. This provision cannot be 22 applied in such cases. Once the purchases are held to be bogus then the trading results declared by the assessee cannot be accepted and right course in such case is to reject books of accounts and profit has to be estimated by applying a comparative profit rate in the same trade. Though there can be a little guess work in estimating profit rate but such profit rate cannot be punitive”.